Cash flow hedges
The company engages in a number of hedges with the aim of reducing the adverse effects of cash flows in the future. The hedges help in locking into a fixed rate of currency exchange for future transactions. The cash flow hedges include the following:
- Interest rates swaps.
- Foreign currency forward.
- Foreign currency options.
Valuation of Cash and Cash Equivalents
The cash and cash equivalents were valued at a fair cost. The total value was $581.7 of December 2011 (McDonald.com, 2012).
Investments
Corporations usually give more consideration to highly liquid investments when doing investments. Specifically, the corporation invests in investments whose maturity period is not more than 90 days (3 months). This gives the reason why the cash and cash equivalents have been increasing continuously. The corporation, however, registered a decline in the total value of cash and cash equivalents in the year 2011. This can be considered negative as compared to the trend it had in the previous financial years.
The reason for the decline in the total value was the loss registered from the income-generating activities. The corporation engages in the sale of restaurants and franchises. There are also lease arrangements that the company engages in with other corporations and individuals (Kieso, Weygandt, & Warfield, 2010). The corporation leases out facilities for a given period of time and in return gets interest payments and lease rentals. In 2011, cash received from operating activities increased by a high margin compared to the value in the previous year. The increase was $808 million which is approximately a 13% increase.
The incremental margin suggests that the corporation was more involved in income-generating activities. The staff expanded their activities in the sales and leases during 2011. Probably there was an increase in the variety of products offered by the corporation. This led to an increase in the clientele base. More people were attracted by the products since their needs were catered for. This ultimately led to the growth in revenues.
The corporation spent more on investing activities as compared to the previous year. The total amount was in excess of $515 million. The higher capital expenditure was, however, offset by the sale of restaurants in 2011. The corporation registered lower proceeds from the sale of the restaurant and leasing businesses.
Cash Outlay
McDonald’s corporation registered an increase in the cash outlay in financing activities in 2011 compared to the year 2010. The incremental margin was due to the rise in the value of the common stock dividend and purchases of the treasury stock. The company also registered lower proceeds from stock option exercises. However, the cash outlay was subsidized by an increase in the debt issuance in 2011. This nets the total cash outlay for financing to be $4.5 billion (McDonald.com, 2012).
The company’s cash and equivalents had a lower value in 2011 due to the above-mentioned reasons. Specifically, the registered value was $2.3billion. As compared to the previous year, the incremental margin was lower by $540million ($591million-51million). To meet short-term funding obligations, the company must add funds through the debt financing option. These include commercial paper borrowing and the line of credit agreement in addition to the cash and equivalents on hand and from operating activities.
Capital Expenditure
In the year 2011, the corporation opened and closed a number of restaurants. In some places, traditional restaurants were replaced with satellite restaurants. The business opened a total of 1,150 new restaurants in 2011 (1,118 traditional and 32 satellites). The company closed a total of 377 restaurants (246 traditional and 131 satellites). The majority of restaurants were opened and closed in 2011 and the previous year.
The main reasons include the loss of real estate tenure and the performance in sales and profits during a financial year. The percentage of franchised restaurants in 2011 reached 80%. The majority of the restaurants are located in the major markets. The capital expenditure for the year (2011) rose by $595 million, which is an approximately 28% increase. This was due to a high increase in reinvestments in old restaurants and investments in new restaurants (McDonald.com, 2012).
Dividend payments
The corporation paid a total dividend of $2.53 per share in 2011. This value is a reflection of the quarterly dividend of $0.61 per share paid in the 3 quarters. However, there was an increase in the value of dividends paid. This was $0.70 per share. This gives an increase of 15% per quarter in the dividend value. This makes the company rely on the cash flow for sustainability in the foreseeable future.
Inventories analysis
The corporation has always registered a steady increase in its inventories from 2009 to 2011. The inventories are always measured at a lower cost or market. The effects of inflation on the values have always been reflected in the prices of the products (Kieso, Weygandt, & Warfield, 2010). There are always cost control measures that have been put in place to account for inflation.
The valuation of inventories is also dependent on the level of competition. If the competition is stiff in a business area, the inventories may be valued at a lower cost of the market value to simply attract more customers. The result is a reduction in the prices of the products of the corporation. The market is also a determinant factor in the valuation. If the market value is higher, the inventories are thus revalued at a higher cost.
Analysis on Receivables
The company’s receivables from the hedging activities were not affected diversely in 2011 because the hedging counterparties in the year did not default much as compared to the previous period. This means that the credit risk exposure was minimal. As of December 2011, neither the company nor the company was required to post collateral in case of default. The only collateral was on hedging for supplementary benefits.
The corporation’s value of notes and accounts receivables on December 31, 2011, was $1,334.7 million. This is in contrast to $1179.1 million in the previous year. The figure implies an increase of approximately $200 million. More debtors responded positively by repaying their debts which led to an increase in the value.
The list of components of cash and cash equivalents of McDonald’s Corporation
- Cash in hand and at the bank.
- Dividends earned.
- Accounts receivables.
- Inventories.
- Investments.
- Franchise businesses
- bonds;
- marketable securities.
- Net income.
- Dividends paid.
References
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2010). Intermediate accounting (13th Ed). Hoboken, NJ: John Wiley & Sons.
McDonald. (2012). Web.